Low-income and vulnerable insurance customers are finding themselves in “a lose-lose situation” when it comes to taking out insurance, a report has said.
Co-published by the Institute and Faculty of Actuaries and steering group Fair By Design, the report said these customers were facing a degree of market failure but were “unable to sufficiently prove a market failure to the government and regulators, and unable to take any legal action”.
As a result of insurers’ risk-based pricing - a process which is increasingly becoming more individualised - the report argued low-income and vulnerable consumers continue to face higher premiums, or are refused insurance altogether, due to the greater risks they pose.
The report highlighted concerns shared by consumer advocates over insurers potentially being “in breach” of the Equalities Act, passed more than 10 years ago.
But finding the data to prove this “breach” to the government and regulators is tricky, it said.
“Consumer advocates have stated that they are often not able to obtain enough information from insurers about how assessments are made or what data sources have been used,” the report stated. “They have called for this lack of transparency to be looked into.”
Through a Treasury Select Committee inquiry in 2019, the Financial Conduct Authority found several insurance firms were unable to provide immediate answers on the algorithms which sit under their pricing, how they compile data, and whether each piece of data was compliant with the Equalities Act.
The financial watchdog has since announced its Customer Duty principle, set to come into force next year. It is designed to ensure financial services products across the board provide fair value, which translates to a fair relationship between the price the customer pays and the quality of benefits and services they receive.
But without a clear view of the data insurers use to price their products, consumers will find it hard to prove whether this relationship is fair or not, the report argued.
“Consumers and their advocates have reported that they cannot assess whether a high or unaffordable premium, or an insurer’s decision not to offer cover at all, is reasonable or fair,” it said.
“They believe that this leaves them in a lose-lose situation – unable to sufficiently prove a market failure to the government and regulators, and unable to take any legal action.”
The report has called for a number of industry changes. One would see the end of monthly payment premiums paid by people who cannot afford to purchase an insurance product in one payment.
Another proposed the UK government facilitate the delivery of a “minimum level of protection” through the use of social policy interventions in an effort to close what they have called the insurance industry’s “poverty premium”.
A problem before the pandemic, the “poverty premium” is only set to widen post-pandemic according to the report, as the government’s furlough scheme comes to an end and the UK’s inflation rate continues to sit above the bank’s target.
“We consider it timely for the government to consider its role in addressing the poverty premium in insurance and to take forward our findings with the FCA [Financial Conduct Authority] and industry”, the report said.
David Heath, chair of the IFoA’s policy advisory group, added: “While the poverty premium existed in insurance prior to the Covid-19 pandemic, the job losses and other negative economic impacts precipitated by the pandemic are likely to have exacerbated its incidence and impact across our society, and will continue to do so in the future.”
The report suggests the government could extend the Flood Re model of insurance for different insurance product lines, to cover low-income and vulnerable consumers who are priced out or excluded from the market.”
The Flood Re Scheme, a joint initiative between the UK insurance industry and the UK government, began in 2016 to improve the availability and affordability of household insurance for consumers who live in high flood risk areas.
It created a not-for-profit reinsurance fund which enables insurers to insure themselves against losses because of flooding.
The IFoA and Fair By Design suggest equivalent schemes under names such as Postcode Re or Health Re.
They also recommend the creation of “clear and simple products”, in line with the 2013 Sergeant Review which they argue was “not adopted by the insurance industry”, as well as more auto-enrolment requirements for employers to boost group insurance access, and the introduction of microinsurance for those most at risk.
“The government should work with the FCA and industry to determine what changes are needed within the public policy and regulatory environment to support and incentivise the insurance sector to develop and deliver innovative solutions to address the poverty premium.”
In the meantime, the report said: “The FCA should support the government in this work by undertaking a study into the regulatory outcomes the market is currently delivering for low-income consumers. This study should also consider the interaction between the Equality Act and insurance pricing.”
Liz Barclay, chair of Fair By Design, said the insurance market “continues to chase the ‘healthy and wealthy’ – the ‘best risk’”.
She continued: “The issues that this report brings to light are difficult and span the remits of government, regulator and industry.
“But people’s lives are messy and don’t fit neatly into institutional remits. We need solutions that fit people rather than institutions. We need collaboration and leadership. I hope this report, and the collaborative approach that went into it, are just the start of the dialogue and action.”
To inform the report, Barclay’s team and the IFoA held individual discussions and roundtables with bodies such as the Competition and Markets Authority, the Chartered Insurance Institute, HM Treasury, the Financial Services Consumer Panel, and the FCA.
ruby.hinchliffe@ft.com
